McKinsey&Company highlight the reliance on subjective pricing prevails in the marketplace, even in the era of big data and online price transparency. Most merchants price items with embellishments higher than ones without these extra features, although they typically do not know how much of a premium the embellishments should command.
Pricing is one of the most challenging areas for fashion apparel retailers due to high SKU complexity, limited item comparability, and frequent flow of new collections. Historically, pricing has been more art than science. However, the ability to apply statistical approaches to even highly seasonal products such as fashion shorts, or high-priced goods such as luxury handbags, can drive substantial improvement in sales and margins. Although technical pricing solutions have existed for more than a decade, most merchants are sceptical of their effectiveness. Instead, merchants prefer to rely on an intuitive sense of what the consumer would be willing to pay, competitive benchmarking, and margin contribution.
McKinsey&Company have found a model which enables merchants to enhance their business judgement and gut intuition with science. This model is called heuristics and it mirrors many of the trade-offs that typically run through merchants’ head when pricing an item. The model uses internal and external metrics that incorporate a wide range of relevant factors. It applies a rigorous statistical analysis to filter those factors and tailor the metrics to fit each retailer’s business strategy.
Retailers can also apply this methodology to understand the optimal number of price points within a category. Most retailers use few price points, out of habit and familiarity, and there is often a correlation between this small number and lower average ticket prices. Other retailers resort to too many price points, generating consumer confusion over differences in product value. By optimizing the number of price points they use and ensuring that their merchandise selection aligns with these new prices, retailers could capture a tremendous amount of incremental gross-margin opportunity. Although this approach relies on the “science” of external analytical tools, it remains rooted in the “art” of merchant expertise and knowledge. Because it is based on strategic decisions for weighting indicators, it is a flexible model that can easily be updated to keep pace with changing business strategies.
As long as fashions change with the seasons, there will always be an element of unpredictability in apparel pricing. Retailers have much to gain by harnessing the wealth of knowledge they have at their disposal and applying these innovations to their apparel pricing strategies.